If one has to put a finger on the most far reaching Reform with transformative outreach of the past hundred years in the Indian economy, then probably, many of us would likely select the Insolvency Reform unleashed in 2016.
Visionaries like Dr Raghuram Rajan and N. Rangachary had set the ball rolling in 2014. The Bankruptcy Law Reform Committee (BLRC) which was set up in August, 2014 under the chairmanship of Mr. T.K. Vishwanathan (former Secretary General, Lok Sabha and former Union Law Secretary) with the mandate of suggesting comprehensive in the Bankruptcy space. The BLRC extensively studied the insolvency regime within India as well as various international jurisdictions and proposed an all-encompassing law for corporate and individual insolvency, assimilating the best practices from across the globe.
On 26th May 2015, the lawyer turned politician Arun Jaitley took charge as Finance Minister. The legal background helped as he introduced Bill No. 349 of 2015 in the Lok Sabha on 21st Dec that eventually culminated in the Insolvency and Bankruptcy Code (CODE) to get the Presidential assent on 28th May 2016.
It is time there is an enhanced awareness of these violent undercurrents that are changing and consolidating the foundations. This series of articles on the CODE looks at the elephant from different perspectives, to understand how the economy is changing at a deep structural level, beyond the inferno of NPAs raging all around us.
This series of articles on THE CODE, looks at the elephant from the different perspectives, to understand how the economy is changing at a deep structural level, beyond the inferno of NPAs raging all around us.
The Financial Stability Report released by the Reserve Bank of India (RBI) in June 2018, indicates that the Gross NPA ratio of Scheduled Commercial Banks rose from 10.2 percent in Sep’17 to 11.6 percent in Mar’18 and is anticipated to rise to 12.2 percent by Mar’19. Besides the SCB, there is a huge NBFC sector where there exists some more stressed assets although GNPA is much lesser, at 5.8 percent in Mar’18.
While there are many reasons that has driven this stupendous growth in stressed assets, one of the factor has been the tendency of treating contracts in a casual way, with costly litigations facilitating the tendency to jump contracts. And the other factor has been the ability of unscrupulous elements to game the system by playing on information asymmetry as they merrily borrowed from one bank to pay another, if not from the same bank to perennially ever-green the loans. These two problems required a systemic solution.
It was particularly true when the bookkeeping was done manually in banks. Arrival of computers did not help much as banks were still performing as oasis, in the vast deserts. The arrival of networking however heralded the first problem for these unscrupulous elements. The corporate office or the central credit observer could now track the promoter and curtail his ability to borrow from different branches of the same bank.
A significant step was taken in Feb 2014, when the RBI issued a revised framework for resolution of stressed assets. An important part of the framework was the setting up of the Central Repository of Information on Large Credits (CRILC). CRILC captured all exposures of banks above Rs 50 million. The data was accessible not just to the Reserve Bank but also to banks.
It gave Reserve Bank a comprehensive view of the banking system’s exposure to a large borrower. It also gave the central bank, a perspective on how different banks treated similar levels of non-performance as it revealed how the exposure to the same borrower was classified differently by different banks.
Four years later in Feb 2018, the central bank tightened the reporting norms further, when it mandated, the lenders shall report to CRILC, all borrower entities in default (with aggregate exposure of ₹ 50 million and above), on a weekly basis, at the close of business on every Friday. This was the reporting of non-performance, the declaration of an asset as NPA was still governed by the SMA matrix.
The criticality of Information was realized when the Bankruptcy Reforms came up for deliberations and then in the formulation of the Code as well, when it mandated the setting up of Information Utilities (IU). This pillar would be the data enabler that would lubricate the process of establishing facts, plain simple dry facts of debt and liabilities.
The Kingpin in the Insolvency Process, the Insolvency Professional is supported by the Information Utilities with all the required information, in his efforts to prepare the Information Memorandum in the first place and thereafter to work out an optimum Resolution Plan. We shall come to the specific duties and responsibilities of the IU in a while.
There is only one Information Utility, namely, National eGovernance Services Limited (NeSL) which was registered with the IBBI on 25 September, 2017.
NeSL was incorporated on 24th Jun 2016, as a Union Government Company with a paid up capital of Rs 30 cr. However the genesis of NeSL goes back to 2014, around the same time when RBI had worked out the CRILC for tracking the large accounts.
Rangachary and KV Kamath, the two visionaries had conceived Project National Assets Depository Ltd NADeL, a national scaled project that would provide citizens with a single view of various financial and non-financial assets. It was based on principles of consent based data sourced digitally with full audit trails, stored digitally in a secured environment, to be made available to the authenticated users.
In the meanwhile the CRILC project took off at the Reserve Bank of India. There was a need felt to have something similar and even more comprehensive for the broader Credit space, looking beyond the banking space and the immediate burning NPA problem. The idea was to ensure at a broad level the basic contract enforcement between two parties, one of which was a creditor. It was imperative to have objective, established and authenticated contracts so as to enforce the contracts and also facilitate quicker resolution of litigations arising out of non-performance of contractual liabilities. The inferno of NPA caused this need to be felt even more acutely.
This need and the contours of NADeL converged, when the Banking Legislative Reforms Commission recommended setting up of a Information Utility for establishing an aggregated database, from which evidence could be sourced, facts established as per law, enabling fact based resolution of credit delinquencies.
Eventually on 24th Jun 2016, NeSL was incorporated, almost one month after the Insolvency and Bankruptcy Code 2016 received Presidential assent on the 28th May 2016. The various dots got connected as the new edifice formed its contours in the Indian Finance landscape.
Part IV, Chapter V, of the Code, provides the details of this important pillar of the Code, some of the salient features are,
1. Sec 212, requires the IU to set up a Governing Board with prescribed independent members to ensure stringent governance standards;
2. Sec 214 outlines the obligations of an IU, to create and store financial information, by accepting electronic submissions of financial information, counter party authentication of such submitted financial information, provide access to the stored information, and most significantly, provide inter-operability with other information utilities.
3. Since the IU is set up as a corporate entity, the Code also provides u/s 215 (1) for the IU to charge fees for information submission and for information access. It does not explicitly provide for fees for storing of information.
The IBBI or the Board vide Notification dated 31st March 2017, issued Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017.
It detailed out the eligibility for a company apply for registration as an Information Utility under the Code. Amongst other requirements, it mandated the applicant to be a public limited company having a minimum networth of Rs 50 cr, and established with the sole objective of providing these (information) services. It also required an application fee of Rs 5 lacs for registration.
It also detailed out the conditions of Registration, salient ones being, a fee of Rs 50 lacs to be paid to the Board, and a recurring annual renewal fee of Rs 50 lacs.
The IU Regulations also mandate setting up of the Governing Board with atleast half independent directors. It mandates the setting up of Regulatory Committee comprising exclusively of independent directors. It also mandated the office of the Compliance Officer who would report directly to the Regulatory Committee.
Section 11 of the IU Regulations provides clear safeguards to the Compliance Officer, as sub clause (4) reads, “The Governing Board shall appoint or remove a compliance officer only by means of a resolution passed at its meeting.”
At the same time, u/s 11 (2) the Compliance Officer is mandated, “the compliance officer shall, immediately and independently, report to the Board any non-compliance of any provision of the Code observed by him.”
The IU Regulations flesh out the duties and services of the IU that are briefly mandated in the Code itself. It has outlined all the processes, including the process of registering Users, and also the nature of details that a Registered User needs to provide while submitting information.
Form C is detailed out in the Regulations itself, like Details of the Debt Creator, Details of the Debt Counter Party, Details of the Debt itself, and if there is security involved, then Details relating to Creation of Security on Debt, and goes to the extent of the Details relating to Default of Debt, if any.
Every User wanting to use the Utility, needs to register on the site, providing relevant details including Board Resolutions. Sec 18 (2) of the Regulations also mandates “the information utility shall verify the identity of the person under sub-reg (1) and grant registration.”
Besides receiving information, the Utility is also mandated to store the information so received in a safe environment, in India, and to be governed by the laws of India.
However, the most important duty of a Utility is providing access to information, to the User, the parties to the Debt, and other relevant stakeholders. Since the entire focus of the Code is on the Fulcrum, the services that the Utility need to provide to Insolvency Professionals is specifically elaborated in Chapter VII of the Regulations, u/s 38 (1).
“An insolvency professional may submit reports, registers and minutes in respect of any insolvency resolution, liquidation or bankruptcy proceedings to an information utility for storage.”
NeSL was incorporated on 24th Jun 2016, promoted by seventeen shareholders, all key players from the financial landscape; SBI (10%), Canara Bank (10%), Bank of Baroda (10%), ICICI Bank (9.9%), Axis Bank (9.5%), Karnataka Bank (6%), LIC (6%), HDFC (5%), Indian Bank (5%), PNB (5%), NIA (5%), Union Bank of India (5%), CDSL (4%), Dena Bank (4%), NABARD (2%), United India Assurance (2%), SIDBI (1.6%).
The Board, chaired by N. Rangachary himself, is a virtual roll call of the leaders in the Indian Financial spaces. The independent directors include, Dr Nivedita Haran (IAS), Prof Sadagopan Director of IIIT, Dr Ajay Shah, CA TS Vishwanath, and nominee directors from SBI, LIC, and ICICI Bank, with S Ramanan as the MD & CEO
NeSL applied for Registration as Information Utility, after the Board notified the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, on 31st March 2017. The due diligence process was soon enough completed and it got the license to operate in September 2017.
The Fourth Pillar, after the NCLT, IBBI and Insolvency Professional, was now in place.
In the past one year or so of its operations, NeSL has laid out the operating framework. Being essentially a digital setup, it does not take any paper. From a business model perspective, it has bright prospects, with a huge market opening up ahead of it. Not just that Sec 18(4) of the IU Regulations, gives it a monopoly for an extended time window,
“A person registered once with an information utility shall not register itself with any information utility again.”
The Banks are mandated to store all the debt information with the Utility. For the fresh debt being created, there is a clause in the debt agreements itself that makes it mandatory for the debtor to authenticate the debt on the Utility. This would ensure zero delay in case of insolvency arising in future.
However, the role play for the Information Utility goes far beyond the current inferno of NPAs. In a decade or two, when the present day NPA pile up would have become past tense, the IU would have matured as it would by then have become a huge Data Centre that would house all credit transactions in the economy.
For example, when a home buyer makes the first set of downpayment to the builder, she would submit the complete information of the Sale Agreement to the Utility, including the payment instalments, even when there is no loan, and the delivery schedule from the builder. The Builder would counter authenticate the Agreement in the Utility itself. The contract would move in its journey towards the final enforcement of the contract, i.e. the good delivery of the apartment to the buyer, any delays would be captured. Defaults would be disseminated across the board to all the stakeholders, including the financial creditors of the builder. And penalties would be imposed without delays, on either side of the Agreement.
In case there is a loan taken by the homebuyer, then the Financial Creditor would submit the information to the Utility and the homebuyer would counter authenticate it. Again contract enforcement would be monitored throughout its journey until the last instalment is paid by the homebuyer.
In itself it is a mere digital platform rightly called e-Governance service provider, and does not take business decisions like, declaring a particular entity as a defaulter. It limits itself to disseminating information on when a scheduled payment that was supposed to happen did not happen. This helps in other stakeholders to take note. This strategic initiative of setting up the Utility is set to change the contours of the economy.
NeSL, and in particular its CEO, the young and dynamic S. Ramanan, do realize its pivotal position in the economy that goes beyond the role envisaged in the Code itself. The Utility has got its pricing strategy pretty much right to get going.
For Companies, the annual submission fees start with Rs 300 for the first Loan Record, then slipping to Rs 100 for 2nd to 10th loan records with Rs 50 per record thereafter.
For Individuals, it is flat Rs 50 per record.
More than the financial creditors and debtors, it is the operational players that would play a key role in taking this reform beyond the bankruptcy space, into the realm of improving contract enforcement in the economy.
The Operational Creditors can upload documents like Purchase or Service Order, Demand Notice, Lorry Receipt, Transport Receipt, GRN, Debit Note, Delivery Receipt etc. NeSL has kept the charges for these @Rs 200 per submission. Once uploaded these documents have a permanence in the system. And if there is any dispute, including insolvency, then contract enforcement, that had been the bane of the economy, often being the main cause of business failures, becomes quick and dry.
NeSL, is no more a project, like its genesis NADeL, but an institution in itself, the much needed oxygen for the Indian economy.
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